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how to fund a startup
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how to fund a startup
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If several VCs are interested in you, they will sometimes be willing to split the deal between them. They're more likely to do this if they're close in the VC pecking order. Such deals may be a net win for founders, because you get multiple VCs interested in your success, and you can ask each for advice about the other. One founder I know wrote:
Two-firm deals are great. It costs you a little more equity, but being able to play the two firms off each other (as well as ask one if the other is being out of line) is invaluable.
When you do negotiate with VCs, remember that they've done this a lot more than you have. They've invested in dozens of startups, whereas this is probably the first you've founded. But don't let them or the situation intimidate you. The average founder is smarter than the average VC. So just do what you'd do in any complex, unfamiliar situation: proceed deliberately, and question anything that seems odd.
It is, unfortunately, common for VCs to put terms in an agreement whose consequences surprise founders later, and also common for VCs to defend things they do by saying that they're standard in the industry. Standard, schmandard; the whole industry is only a few decades old, and rapidly evolving. The concept of "standard" is a useful one when you're operating on a small scale (Y Combinator uses identical terms for every deal because for tiny seed-stage investments it's not worth the overhead of negotiating individual deals), but it doesn't apply at the VC level. On that scale, every negotiation is unique.
Most successful startups get money from more than one of the preceding five sources. And, confusingly, the names of funding sources also tend to be used as the names of different rounds. The best way to explain how it all works is to follow the case of a hypothetical startup.
A lot of startup founders say they started the company without any idea of what they planned to do. This is actually less common than it seems: many have to claim they thought of the idea after quitting because otherwise their former employer would own it.
Every startup's rule should be: spend little, and work fast.
They've also written at least a skeleton business plan, addressing the five fundamental questions: what they're going to do, why users need it, how large the market is, how they'll make money, and who the competitors are and why this company is going to beat them.
If you have to choose between spending time on the demo or the business plan, spend most on the demo. Software is not only more convincing, but a better way to explore ideas.
While writing the prototype, look for money.
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